Pensions de-risking deals undertaken by the FTSE-350 last year resulted in a share price rise of 8% on average, according to research* conducted by international law firm Freshfields Bruckhaus Deringer. The findings suggest the markets are starting to wake up to the considerable long-term benefits of tackling defined benefit pension scheme risk.
Overall, FTSE-350 companies which undertook pensions de-risking deals also saw shares outperform their peers. While the FTSE-350’s shares fell by 0.2% on average over the period analysed, companies which undertook de-risking deals saw their share prices rise by 1.7%.
However, market reception is more mixed when looking at the bigger picture. Of the 26 deals analysed, 23 were undertaken by FTSE-350 companies and three by international corporations with UK subsidiaries. The transactions comprised 15 buy-ins, six buy-outs and five longevity swaps. Two-thirds of pension scheme de-risking transactions undertaken by listed companies with UK pension liabilities triggered a fall in the company’s share price in the five-day period following the announcement of the transaction. On average they triggered a 1.3% share price increase. In contrast, traditional moves to tackle pensions scheme liabilities such as closures benefited from a more positive market reception, with shares rising 1.7% on average in the sample analysed.
Freshfields’ pensions partner Charles Magoffin says, ‘Pensions liabilities are among the most pressing financial issues facing UK businesses. The FTSE-350’s pensions liabilities alone are estimated to be more than £100 billion. Their sheer scale, volatility and seeming intractability is a daunting prospect for many companies.’
‘Longevity concerns, market volatility and tightening regulation are among the many reasons trustees are taking steps to minimise risk. However, de-risking requires a significant up-front capital investment, so it’s not surprising that market reaction has previously been mixed.’
Market reception has been move positive in the UK with just under half (48%) of deals resulting in a share price rise. In contrast, 100% of the pensions de-risking deals undertaken by companies listed on international stock exchanges resulted in a share price fall. Pension Insurance Corporation, BMW and Pall Corporation saw shares dip -1.6% on average.
While six of the FTSE-350’s examples (23%) took place ahead of, or during, a significant corporate deal, a clear pattern does not emerge. London Stock Exchange, which was seeking to buy Canada’s TNX Group Inc, saw its shares rise more than 7%. However Cadbury, which was in the middle of a hostile takeover bid by Kraft; British Airways, which was merging with Iberia; and Cable & Wireless, which was at the centre of demerger speculation, all saw shares fall.
Charles adds, ‘With the Pensions Regulator becoming increasingly interventionist and pension scheme trustees ever more powerful during the M&A process, pension deficits can make or break a corporate transaction. De-risking deals can smooth the way for a corporate transaction to proceed and can make it easier to raise finance. Removing deficits from the equation goes a long way to appeasing buyers and trustees get some reassurance that members’ benefits will be protected. The markets are sometimes underestimating the role that pensions have to play.’
‘However, pension de-risking is not a one-size-fits all solution. It is technically and legally complex and pricing is notoriously difficult. There is also evidence that using derivatives and other financial products to reduce the risk and volatility of pensions liabilities can significantly increase funding costs, which is certainly a reason for the markets to tread with caution.’
‘The challenge for companies, pension scheme trustees and financial institutions is to ensure that the markets understand fully the long-term benefits of de-risking. Firstly, pension liabilities are volatile and unpredictable. De-risking can effectively fix any or all of the main risks and liabilities that a pension fund must manage – longevity, interest rate movements, inflation and asset performance.’
‘Secondly, it can deliver a permanent improvement to the company’s balance sheet and thus its funding position. This will leave it in a better position to take part in acquisitions and raise finance, and may remove a barrier to a merger or takeover of the company. Corporates who treat seriously and decisively their most critical financial challenges should expect to be rewarded by the market.’
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